Reduce Benefit for Prior Lump Sum

[jwb0323]

I have a participant who worked, termed, took a lump sum, but was then rehired. The plan docuemnts says that for benefits for someone who took a lump sum you use all service and then reduce that amount for the actuarial equivalent of the lump sum.

1) What happens if the benefit we calculate for this person using post lump sum payout service is greater than the amount we would get if we use total service and deduct the lump sum?

2) If the lump sum was paid out in 2000, do we have to go back to 2000 and figure out the AE definition at that point to redice the annuity? Or, can we simply take the lump sum paid out and reduce the current benefit? Or, take the annuity benefit and convert to a lump sum using current assumptions?

Thanks,

[Effen]

In all things, do what is reasonable and consult with the fund's attorney.

Is this a traditional DB? If so, I would offset the current benefit (determined with all service) with the AB based on pre 2000 service. I don't think I would mess around with converting from the lump sum unless I didn't know what the basis of the original lump sum was. If you know the AB used to determine the original lump sum, then just use that as the offset. If you don't know the AB used, I would use the AE from 2000 to reconstruct the AB.

If you used the original AB as the offset, I don't think question 1 is possible.

[david rigby]

Any precedent?

BTW, if you are not the actuary, the plan's actuary should be involved in this discussion.

[jwb0323]

I am the actuary. It is a traditional DB plan. I am working on getting the accrued benefit that was used when determining the original lump sum. The records are hard to get because the plan was taken over a few years later and older benefit calculations and/or plan documents are hard to find. My initial thinking was to get the original annuity benefit and reduce using that.

Thank you,

[jwb0323]

What if the prior benefit was determined using a different benefit formula?

[Effen]

Not sure I understand the context of your followup question. Why would you think that would matter?

[My 2 cents]

Not sure I understand the context of your followup question. Why would you think that would matter?

Agreed. I would expect that if the accrued benefit cashed out n years ago was a deferred benefit payable as a single life annuity of $120 per month starting at age 65, however arrived at, and the plan's normal annuity form is still a single life annuity payable starting at age 65, $120's your offset. How could it not be?

[tymesup]

Off the shelf:

The participant probably doesn't get the prior service unless they repay the lump sum.

There may be a deadline for repaying the lump sum.

Repayment is with interest, I think at some federal interest rate that was pretty low.

Repayment of a partially vested lump sum can restore a fully vested accrued benefit.

What does the plan say?

[My 2 cents]

Off the shelf:

The participant probably doesn't get the prior service unless they repay the lump sum.

There may be a deadline for repaying the lump sum.

Repayment is with interest, I think at some federal interest rate that was pretty low.

Repayment of a partially vested lump sum can restore a fully vested accrued benefit.

What does the plan say?

Agree in particular with "What does the plan say?"

Many plans call for an offset instead of cancellation of service if a prior lump sum is not paid back.

If a plan specifies what has to be done to repay a lump sum, if the participant does make the repayment accordingly, then it would always be as though the original lump sum had never been paid (i.e., no offset, no loss of service).

[jwb0323]

The plan document states to reduce the benefit determined based on total service and pay by the actuarial equivalent of the lump sum payment recieved. The lump sum was paid out in 2000.

When we determine the benefit under the current formula, the lump sum paid out is greater than what the lump sum would be now, so no benefit is due.

[My 2 cents]

Does one use the current equivalence basis under 417(e) to determine the lump sum or the lump sum equivalence basis in effect when the lump sum was paid in 2000?

It just does not sound right that the lump sum already paid should result in an offset greater than the accrued benefit that was cashed out. How could the current formula legitimately produce an accrued benefit lower than the accrued benefit in 2000?

[jwb0323]

What about just calculating the benefit earned after the lump sum payout only ?

[My 2 cents]

What about just calculating the benefit earned after the lump sum payout only ?

That would probably not match what the plan says to do. According to an earlier post, "The plan document states to reduce the benefit determined based on total service and pay by the actuarial equivalent of the lump sum payment received." I think best practice would say that the amount of accrued benefit that was cashed out back then should be treated as the actuarial equivalent of the lump sum payment received for offsetting purposes.

If possible, one should calculate the current accrued benefit using total (pre- and post- termination) service, dig out of the archives the information for the prior lump sum to see how much accrued benefit was cashed out, and then provide the current accrued benefit minus what the accrued benefit had been that was paid out earlier. If necessary, one could convert the 2000 lump sum to a deferred benefit based on what the 417(e) equivalence basis was back in 2000. Any other approach might cause anomalous results.